The F&F Volume 9
Project Power Recap | Sunday Idea Grab Bag
Friends & Family ("The F&F") — I’ve missed you all! It's been over 2 years since I last published an F&F, and it's not for the lack of guys making moves or me geeking over sub-institutional deals. Compliance officers at a conservative Korean firm are not the biggest fans of personal syndicate newsletters by licensed employees, but alas, I'm back.
I'm not writing about an active deal this week but rather recapping a deal that died. And as many of you know, this deal was (unfortunately) mine. Onwards and upwards, and man, did we learn a lot.
I won’t get into too much about what derailed it, but I tweeted the TLDR last week—it went unexpectedly viral, see below. Also sharing our (redacted) executive summary from the investment memo and the three biggest learnings below so that you can get a taste.
Animal spirits have come alive from this DJT victory and lower-rates cocktail. Equities/crypto are at all-time highs, private credit is still yielding 13%+, and M&A is expected to pick up on the back of expected deregulation—it almost feels too good to be true. It might not be, though. Earnings continue to grow, and there’s a lot of optimism in the economy. Optimism grows risk profiles, in a way subconsciously, and risk fuels growth.
Excited to see how things play out in 2025!
In This Edition
Project Power
The Exec Sum: Generators? You bet.
Three Biggest Learnings: owner dependence, hard conversations are good, and people rock
Different Flavors of Entrepreneurship
Seeking high input-to-outcome correlation
F&F Hat Tip
Benji Stern | GP of Stratus Ventures
Sunday Idea Grab Bag
Life Settlements | Settle
West Village Tex Mex | Taqueria De Luna
High-End Preventative Health Retreats
Pop Up Skate
Project Power: The one that got away. For better or for worse.
As many of you know, I’ve lurked and learned about the world of acquiring SMBs for years now. Everyone needs that friend who just does it to show you that finding a business, raising money, taking a loan, and buying a business is even a thing. Thankful that my F&F, Jonathan York, did just that in January 2021!
When did it get real for me? In Q4 2023, I was out with my now partner, Dylan Tracy, and we got to talking about building/buying SMBs. He’s a career B2B tech salesperson, can grind it out with the best of them, and had that crazy look in his eye saying, “Let’s do this sh*t.” I had recently gotten over the stigma of franchises and fallen in love with their scalability, so we started our search there.
We initially focused on finding a commercial/resi services franchise to launch de-novo within 90 minutes of NYC. Looking at our circle of competencies, our search was simple; we set out to find an essential service that we could sell primarily to business owners, leveraging a modern business mindset + hard work to win market share. And repeat. We learned about dozens of business models, from line painting and HVAC to plumbing and restoration services. We found what business qualities we liked and didn’t like and ultimately decided franchises did not give us a big enough platform or the flexibility to build what we envisioned.
Having refocused on traditional commercial services SMBs with $500k+ in earnings in early 2024, we started the sourcing grind. We signed countless NDAs, navigated brokers, had messy Zooms with elderly business owners, met four owners in person, and ultimately negotiated a LOI to acquire an industrial generator sales and service business in August.
After 2.5 months of diligence and round 1 of the QofE coming back clean, we started raising money. Below is the executive summary from our memo to give you a feel for what we liked, how we planned to grow it, and our target returns. Parts are redacted, so I don’t trip the NDA.
Executive Summary
JD & Dylan plan to acquire [Project Power], a 20+ year-old industrial generator sales and service company with ~$4M in revenue and ~$550k in SDE in 2023. The business provides a critical, non-deferrable product and service with ~[X]% of revenue coming from industrial/commercial customers and is tracking to grow sales by ~[X]% to ~[$X] in 2024.
On August 16th, we signed an LOI with a negotiated purchase price of $1.446M (~2.6x SDE), financed through equity and seller financing (~50%). We will contribute $200k and raise the remaining $859k of equity from friends and industry investors; no bank debt will be used initially.
With over [X,000] lifetime customers, [X,000+] recurring service clients, and a team of [X], it’s a decent-sized, well-run business stuck in the 90s. The owner is a [X]-year-old electrician from [New York] who takes a ton of pride in his work, has made a great living and is keen to ensure his business is in good hands going forward.
[Project Power] counts essential facilities like water treatment plants, surgery centers, prisons, and banks as customers, all required to have backup power solutions. Generators need scheduled service 1-4x annually, providing steady, non-deferrable revenue.
Rising grid instability, increasing severe weather events, and the expanding electrification of homes and businesses are welcomed tailwinds that should drive increasing demand for backup power solutions throughout the hold period.
We believe there's an opportunity to grow the business by improving its online presence (from effectively none), automating sales processes, growing the service, residential, and rental segments, pursuing selective M&A in the fragmented generator service market, and much more.
Our base case has sales growing 15% annually to ~$10M over the next seven years, which is the right amount of aggressiveness in our eyes. Having two highly motivated and incentivized entrepreneurs breathe life into a growing yet sleepy business has the ingredients to work in a meaningful way.
Potential risks include the learning curve for quoting complex generator specs, the risk of tenured employees leaving, and possible economic slowdowns affecting non-essential customer segments. However, we have a plan in place for the controllables, and the core service remains critical across industries. More on that below.
Investors will receive a 10% preferred return with meaningful upside participation targeting a ~5x MOIC with an exit in year 7. We plan to reinvest cash flow to fuel future growth, with the majority of returns coming at exit to a strategic or financial buyer.
A group of ~30 guys ultimately chose to back us, and the money was raised! I will say, the best part of the process was feeling the support of our investors, so thank you to those of you reading this!
As I alluded to in the tweet, though, the deal ultimately did not make it across the finish line for a number of reasons, mainly a retrade and eroded trust between us and the owner. A few pieces I didn’t appreciate when putting myself on the other side of the table: i) most people only sell a business one time, ii) the concept of leaving working capital behind is foreign, and iii) it’s an emotional process from start to finish. I have no ill-will to the owner. He was making the best decisions he could at the time based on the facts that he had. And so did we.
More than happy to chat in more detail if you’re interested! Ping me if you want to read the full memo.
Three Biggest Learnings
I don’t want to oversimplify or generalize anything about the world of buying SMBs or entrepreneurship, but after going through this process, I have three big takeaways:
01) The importance of how owner-dependent the business is should be measured on a sliding scale, and you can structure your deal accordingly. Dylan and I did not come from the generator world or the world of selling to contractors/building engineers. There was a strong team of techs in place, project managers, and a senior salesperson who we would lean on. However, we would still rely on the owner to teach us a lot, introduce us to vendors/customers, instill trust in us across his team, etc. We were never naive to this; in fact, we structured the deal to hedge this risk and requested that he give us 6 months of daily attention during the transition. Structure-wise, we had the owner holding a large note (that we were personally guaranteeing), overfunded the equity, and had ample cash coming to the balance sheet. With the note, you'd think it would feel like we were aligned, but for someone this old, it just didn’t feel like it had a ton of teeth, especially since we were PG’ing it. Plus, we didn’t love hearing him continue to say, “I’ll be here 30-45 days, and you guys will have it down.” Looking back, there are a few different ways that I would’ve structured it from the start given our owner dependence: i) have him roll a double-digit percent of sales price, ii) pay him during the transition period (we couldn’t really make that math work on a deal this small, another learning perhaps), and iii) figure out retention bonuses for key staff in the transaction. If you come from the space, this dependence goes way down, and you can likely stomach a less-than-ideal relationship with the seller.
02) If you aren’t having tough conversations, you need to start. We were extremely friendly with the owner from start to finish, perhaps too friendly. During the first 30 days of diligence, you’re still selling yourself to the owner, so you don’t want to bust chops too much. The next 30 days, you’re really trying to figure out the most important risks / will they kill you while onboarding service providers, who cost money (financially incentivized to close the deal). The owner is very incentivized to say the risks won’t kill you, so we did a ton of third-party calls to build conviction here. But still, you don’t really butt heads with the owner because it’s your job to verify. Then comes talking financials or how the owner referred to them, “the accounting stuff.” We negotiated normalized net working capital into the LOI; the owner agreed, and we thought, “Great, we’re deals guys, and that was easier than expected.” In reality, he didn’t know what that meant until we started talking about “accounting stuff” a month out from closing, which led him to get a new (much higher) valuation when he visited his CPA. Everyone who does a deal says that working capital (aka the accounting stuff) can break a deal, and we should’ve had more tough conversations about it earlier. If you think the owner will care about it, talk about it sooner rather than later. It will be tough now or later.
03) People are amazing and want to support you. I wish I had kept a tally of the number of calls/Zooms with friends, generator business owners, searchers, LMM PE funds, SMB investors, competitors, and other helpful people since August—most from cold outreach! These calls were invaluable in confirming diligence, inspiring confidence, learning about the industry, and pressure-testing our thesis. Also, we literally couldn’t have done it without a lot of these folks because we don’t have that much cash ; ). Thank you again to our cap table! Send the cold DM or ask for the intro—I am consistently impressed with how generous our network is.
Different Flavors of Entrepreneurship
When someone says, “I’m an entrepreneur,” it’s a bit of a weird response—mostly because it doesn’t say much but also because it’s pretentious and/or they’re likely unemployed. Entrepreneurship can mean vastly different things depending on the path you take, making it hard to blanket define.
Most people, myself included, tend to think of entrepreneurship in one of three main flavors:
Creating Something New: This is the classic "net new" path. Uber, Airbnb, or anything that goes from 0 to 1. Essentially, introduces a product or service that didn’t exist before.
Buying an Existing Business or Assets: This could be acquiring a small business, like a generator sales and service company, or buying single-family homes on behalf of investors. It’s less about invention and more about improving or growing something already in motion.
Hanging Your Own Shingle: Starting your own practice—like John Smith’s law firm or a freelance consulting gig. Your name might be on the door, but you often work within a well-defined industry.
I have so much respect for the folks doing the above, but I feel like this list misses another flavor. Why do people even want to be entrepreneurs in the first place? The usual list of motivating factors is easy to rattle off: flexibility to work when you want, autonomy to work on what you want, not answering to anyone, enabling people to provide for their families, “good men (and women) do hard things,” and of course, make a ton of money.
I am not naive; none of these benefits exist right out of the gate. I was ready to be broke, work insane hours, and take crap from employees, customers, and everyone in between. Honestly, I was fired up for that grind, and it felt like a rite of passage that I respected.
When I think about what motivates me the most, it’s not entirely captured on that list above. Sure, the perks are hard not to like, but my real driver is this: I want an extremely high correlation between my input and the financial outcome.
Project Power checked that box for me. Generators are mission-critical for many customers, so as long as we worked harder and smarter than the competition and maintained a great team, we were bound to sell a lot of generators. More generators sold = better exit. In theory, of course.
I’ve been sitting here the last 10 days turning CIMs and strategizing my next acquisition, but I’ve also slowly remembered that the high input-to-outcome correlation I crave exists outside of the three traditional entrepreneurial avenues I mentioned earlier.
Take a broker at CBRE or a recruiter at HSP. On paper, they’re not "entrepreneurs." They didn’t go from 0 to 1, they don’t have their name on the door, and they’re not paying employees. But I’d argue they’re every bit as entrepreneurial. They’re operating within a platform, but their success is still highly dependent on their own output. It’s a classic “eat what you kill” model, and there’s something inherently entrepreneurial about that. Being part of a platform has its advantages—brand recognition, resources, and stability—but it doesn’t take away from the autonomy and hustle required to succeed. In some cases, it might amplify it.
So whether I buy a pool cleaning business, start an SMB M&A advisory firm, join an early-stage startup solving hard problems, sell venture secondaries at an established firm, or something in between, it’ll be something entrepreneurial. Ready to build and have real influence over the outcome.
F&F Hat Tip
I love to highlight when folks are out doing cool things! Let me know if that’s you or a friend.
Early Stage VC Firm, Stratus Ventures: Benji Stern has spent the last three years in San Francisco as a full-time angel investor, focusing on pre-seed and seed-stage companies across various sectors (a few investments include X, Y, and Z). He is now wrapping up the fundraising for Fund 1 (hello discretionary capital) of his new venture firm, Stratus Ventures. Benji's investment strategy centers on partnering with Tier 1 VC firms to back exceptional founders, and a few recent investments that have gone on the raise subsequent rounds include: Traba (on-demand industrial staffing), Monumental Labs (AI Robotics stone carving), and ComfyUI (GenAI video infrastructure). Over the past year, he has co-invested alongside some of the big guys like Andreessen Horowitz (a16z), Founders Fund, and Khosla Ventures. Hit him up if you want to get involved! (803) 960-6578 | benji@stratus-ventures.com
Sunday Idea Grab Bag
What’s a Sunday idea you ask? It’s one of those ideas that comes to you while mindlessly watching Red Zone after a 7am flight home from a wedding. Something about the exhaustion that sets your brain on fire, in a Sunday kind of way. Sometimes, they’re worth digging into further, but usually, they aren’t. Here are a few of my recent ones...
Life Settlements: Hello, uncorrelated returns. Deep in the sea of private credit opportunities lies the life settlement industry. If unfamiliar, investors buy policies from older, ailing people who need cash before they die. Sounds dark, but these people either i) are wealthy and no longer need such a large policy, or ii) they need money to fund the rest of their life. How do they buy them? Brokers! Check out this website (Settle) that this dude I met on Twitter and I built years ago (he built it, I wrote copy). Someone came through last week with a $10m policy, but he’s only 59. If you aren’t over 75, investors won’t touch it unless you have a terminal illness. Brokers generally charge ~8% of face value or 20% of settled value. Would’ve been quite a ticket! Check out how stable these returns are from this fund AIR Asset Management. They’re so smooth that it’s almost hard to believe, tbh.
Queso in NYC: Why on earth do New Yorkers not eat white queso? I’ve been in NYC for 10 years, and it simply doesn’t exist in the capacity we’re used to down south. Someone copy Taqueria Del Sol to a T, call it Taqueria De Luna, and you will print money in the West Village.
Preventative Medical Retreats: Our kids will likely laugh that we used to walk around without knowing that we have a disease growing in our bodies. I’ve loved this company, Ezra Health, for years; they provide full-body scans that can spot far more than the typical MRI. You could partner with a luxury hotel to host the weekend, Function Health for blood tests, and Ezra for full-body scans. Some retreats charge $30k, but you could undercut them by 60% while providing 90% of the value.
Pop-Up Skate: I heard about this one on a podcast, but you essentially partner with malls, parks, schools, etc, to provide a “pop-up skate rink.” This company did $130k in their first 3 months of operations. He refurbished a shipping container, bought a ton of skates + protective gear, and a $4k/month sweetheart deal with his town. Now he’s expanding to do more mobile parties, etc. Not for me, but I dig it.
As mentioned, without the constraints of a highly regulated gig, I plan to take up more real estate in your inboxes throughout 2025. I’m amped!
Hope everyone has a great holiday season with friends, family, and dawgs wins. I’ll be in Atlanta for a ~week after Xmas, so let’s hang if you’re around.
As always, any feedback is more than appreciated. Let’s make 2025 the best one yet.
Your F&F,
JD